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XFinancial (NYSE:XYF)
Q3 2019 Earnings Call
Nov 21, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the X Financial Third Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]

I would now like to turn the conference over to Jennifer Zhang, Investor Relations. Please go ahead.

Jennifer Zhang -- Director, Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining us today. The Company's results were released earlier today and are available on the Company's IR website at ir.xiaoyinggroup.com. On the call today from X Financial are Mr. Simon Cheng, President; and Mr Kevin Zhang, Chief Financial Officer. Mr. Cheng will give a brief overview of the Company's business operations and highlights followed by Mr Zhang who will go through the financials and the guidance. They are all available to answer your questions during the Q&A session.

I remind you that this call may contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on the management current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the Company's control, which may cause the Company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties and the factors is included in the Company's filings with the US Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under the law.

It is now my pleasure to introduce Mr. Simon Cheng, Mr Cheng, please go ahead.

Simon Cheng -- President

Hello, everyone. We are pleased to report a good quarter with strong financial and operational performance. In particularly, I would like to highlight the following significant progress we have made across our business. Firstly, we believe that controlling the credit risk at the origination is critical. Over the past six months, we have tightened our credit policies and shifted our customer segment to higher quality segment to prepare for difficult regulatory and economic environment. Delinquencies of our portfolio have decreased. This helped us to achieve a more stable business, and it reduced loan defaults in the longer time.

Secondly, we are very pleased to report that institutional funding accounted for 35.7% of the loans facilitated through our platform in the third quarter, increasing from 26.7% in the previous quarter. Particularly, the portion of funding from institutions increased to 52.4% of the total loans facilitated in October 2019. We expect institutional investors to fund almost all our new loan originations from the beginning of next year, as our P2P platforms are gradually to be phased out. We have been actively negotiating with our funding partners including CITIC Trust, Kunlun Bank, Blue Ocean Bank, Huishang Bank, Yantai Bank and others to further lower our funding costs and provide the best service to our customer.

Lastly, it is very encouraging to see our revolving loan product Yaoqianhua, previously known as Xiaoying Wallet, growing very rapidly. Transaction volumes for Yaoqianhua jumped significantly to RMB1.4 billion this quarter from RMB971 million last quarter. Then the outstanding loan balance increased to RMB949 million as of September 30, 2019, from RMB578 million as of June 30, 2019. The number of transactions for Yaoqianhua in the third quarter of 2019 increased to 3.8 million from 2.9 million in the second quarter. The number of active users of Yaoqianhua was around 330,000 representing an increase from 220,000 as of June 30, it's a 50% increase. We believe that number of Yaoqianhua users will keep rapidly growing. The business will gradually account for large percentage of revenue as revolving product has longer customer life time and offers multiple types of cross-sell opportunity. Furthermore, for users of Yaoqianhua, we are able to offer more diversified services to enhance the user experience. We are planning to gradually transition from a pure financial service provider to a comprehensive service provider.

Overall, with our customer segment will be shifted to higher quality customers, more and more our income will come from comprehensive service fees, such as merchant fee, management [Phonetic] fee etc in addition to loan facilitation fee. At the same time, there will be lower delinquencies down the road and lower funding costs.

In conclusion, we are very confident in our future growth prospects and our capabilities to create long-term value for our investors and the shareholders. As the industry is in the consolidation, there will be fewer players to continuously provide the user-friendly and convenient personal financial service to the borrowers in China.

China's consumer finance market is huge and growing. Interest rate and the funding cost is in the declining trend. We believe there is enormous potential for our business growth after this consolidation period.

I will turn the call to Kevin, who will go through our financials.

Kevin Zhang -- Chief Financial Officer

Thank you, Simon. We finished the quarter with solid operational and financial results. Total loan facilitation amount was about RMB10.7 billion for the quarter, showing a significant increase year-over-year. While net revenue came it at RMB867 million, which also increased on a year-over-year basis. We are glad to see the number of active borrowers increase significantly to 840,000 in this quarter, which demonstrates continued strong demand from the market. The delinquency rates for all outstanding loans that are past due for 31 days to 90 days, and the 91 days to 180 days as of September 30, 2019 were 2.95% and 4.5% respectively, compared with 3.1% and 4.99% respectively as of June 30, 2019. We believe these reflect the improving quality of our loans. We will continue to strengthen our risk control capability and provide the best loan services to our customers. In addition, we are pleased to see the proportion of institutional funding and revenue contribution from the loan assistance business continuing to grow. As of September 30, 2019, the credit line provided by our institutional partners was around RMB38 billion and has since been expanded to RMB48 billion by the end of October 2019. We are determined to operate in compliance with related laws and regulations, and are actively making a transition to a mode of combination of loan assistance and direct loan under certain license.

What's more, the loan products we facilitated that were covered by ZhongAn Insurance have decreased to 77% in the third quarter 2019. We will continue to reduce our insurance coverage rate to lower our customers' borrowing costs and develop alternative ways to provide guarantees for certain loan products.

Going into next year, we will continue the transformation of our business to ensure it is fully compliant with regulations, reduce costs and improve efficiency, and create more value for our customers and shareholders.

Now I would like to brief some financial performance. Net revenues in the third quarter of 2019 increased by 4.5% to RMB867 million from RMB829 million in the same period of 2018, primarily due to an increase in transaction volumes of Xiaoying Credit Loan and Yaoqianhua this quarter, when compared with the same period of 2018.

Our origination and servicing expenses in the third quarter of 2019 increased to RMB456 million from RMB284 million in the same period of 2018, primarily due to the following factors, an increase in collection expenses for the cumulative effect of the growing business. And the second, continuous investments in customer acquisition, especially for the recently launched revolving credit product, the Yaoqianhua.

The sales and marketing expenses in the third quarter of 2019 decreased by 43% to RMB26 million from RMB45 million in the same period of 2018, primarily due to a reduction in promotional and advertisement expenses, since we are now spending in the [Indecipherable] model.

The non-GAAP net income in the third quarter of 2019 decreased to RMB170 million which is mainly resulting from our continuous investment in customer acquisition. We believe that it's actually our investment will benefit us in the long run both for the high quality customer and the longer user life cycle.

Now I'll turn to guidance. We expect that the total loan facilitation for the fourth quarter of 2019 to be around RMB8 billion to RMB9 billion. This amount is excluding the volume of consumption, especially of Yaoqianhua, which would not generate revenue, so that the guidance would be a better indicator for the financials. This forecast reflects the Company's current and the preliminary views which are subject to change.

Now, this concludes our prepared remarks and I would like to open the call to questions. Operator, please.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from John Cai of Morgan Stanley. Please go ahead.

John Cai -- Morgan Stanley -- Analyst

Hi, good evening, management. Thank you for taking my questions. I have three questions. I guess the first one is about our risk performance, I think our reported delinquency rates declined on a sequential basis due to the tightening of the credit policy previously. So how do we think of the current sector risk meaning that, do you see it's in -- it's a -- because we have already controlled the previous existing rates, is it complies to take more risk now, how is the environment -- risk environment that the management is seeing? And any assessments on the current risk environment and how does that impact our growth? That's the first one.

The second one is, I would like to know more about our product segments. So we see that you provide more details about the term loan and the revolving loan in this quarter. So I just wonder if the management can share about the economics of the term loan versus the revolving loan and I think changes actually, it should be a positive changes on the take [Phonetic] rate for this quarter. So if the management can comment about the take rate changes there, that would be helpful as well.

And third question is a bit technical on the revenue side, I see that the loan facilitation income from the intermediary model pickup for these two quarters, not sure why is that because my understanding is that most of the facilitation should be under the direct model. Yes, that was my question. Thank you very much.

Simon Cheng -- President

Thank you, John. This is, Simon. I'll answer the first question regarding the credit quality and the Kevin can answer the last two, regarding the financials. We have tightened our credit policy, and more importantly, actually we shifted our customer segment to high quality segment. So, down the road, we will see our delinquency keep going down, and this is the one of the segment change or it being in addition to our prudent credit control policy. The financials, Kevin, can answer.

Kevin Zhang -- Chief Financial Officer

Okay. Hi, John. Thank you for your questions. First, about our product mix for the segment, I would like to say, at this moment, the term loan represents our dominant key product and which will contribute more than 95% of the total revenue and our profit, and then you may see when we're talking about the loan volume, at the third quarter, they're about RMB1.4 billion of the transaction volume would have come from Yaoqianhua revolving credit product, that's about 10% of the total transaction volume, but at this time, we are still investing in this revolving credit loans. So actually, the revenue contribution and the profit that we're disclosing for our recycle product for what we see are very limited. And when we're talking about take rates, the general take rate for our term loan will be very similar to the total take rate, that means it's around the 10% and at the Yaoqianhua, the recycle product, it's take rate is about 13% [Indecipherable] our term loans. And actually our take rates all remained stable in the last quarter, means that now our total pricing remained challenging and our operating cost and our [Indecipherable] are relatively stable, so the sort of take rate will be very similar to that in the Q2, but I would like to draw your attention that as previously mentioned by Simon, we are targeting high quality customers and we are also changing our pricing mechanism.

Now you said pure finance sales service income and we are now receiving comprehensive sales income by the directing our user base into our membership systems from November. So a series of package of rights, which are composed of consumption rights and financial rights will be sold to our members. So later on, so our revenue will be actually split into two parts, one is from our pure loan facilitation revenues and then the remaining will be some service income from branching service income that direct chartered to our customers.

And as each comprehensive incomes are not kind of binded with the loans, so ([Indecipherable] change, I mean in the future. So at the moment, so we have a different view about how other take rate changes, that means in Q4, the take rates will not be lower, by the way have some additional comprehensive service income. Yeah. I hope that this [Indecipherable] questions.

And your third question when you're talking about intermediary -- sorry, the revenue from t;he intermediary model. Yeah, actually we -- in Q2 and Q3, when we had the loans under the [Indecipherable] model, actually some of our partners, they -- we would have to -- we have to transfer the [Indecipherable] from sorry, we offered -- issue the loans -- view our partner micro loan companies and then transfer toward those institutional funding partners. So at this model, and we will have more intermediary level revenue. So that's why our revenue intermediary level increased in Q2 and Q3.

John Cai -- Morgan Stanley -- Analyst

Thank you. That's helpful. So, if I may follow-up on the risk, so just want to get a sense of the management assessment of the current environment, because we have heard that some players are doing the maximum risk and is also is regulatory tightening on connections, data analytics etc. So what's the management assessment on the current risk level on the sector as a whole? So do you see that it's more risky now as compared to maybe a quarter ago and how does the regulations impacted the overall collection efforts and [Indecipherable] rates or delinquency rates. Yeah, just any color so on that from the management would be very helpful. Thank you.

Simon Cheng -- President

Okay. Thank you, John. Actually, it's a very tough regulatory environment right now, there are a lot of changes recently. Overall, we believe that where actually needed to industry consolidation and some players will leave the industry and in the new environment. But for us. actually we are prepared for these and as we, as I said earlier, we are shifting our customer segment to high quality segment, which means either has a less issues with recent regulatory development and also this better quality segment more resilient to the economic change. So this is our strategy and overall we believe for certain segment there might be a deteriorating situation, but for the segment that we are talking right now, actually it's still quite healthy and for improvement [Indecipherable] in China is quite stable and the for consumer finance business for the high quality segment actually is still quite stable.

John Cai -- Morgan Stanley -- Analyst

Thank you, Simon.

Operator

[Operator Instructions] The next question comes from Luvian Hun [Phonetic], a Private Investor. Please go ahead.

Luvian Hun -- Private Investor -- Analyst

Thank you for taking my question. My question is about the credit risk, we can see the risk items in the P&L like provisions for accounts receivable and contract sales and fair value items like fair value adjustment related to financial guaranty derivatives and fair value adjustment related to consolidated shares, we can see [Indecipherable] increased compared by Q2, you mentioned that the delinquency ratio was improved compared with the Q2, so which side showed the real credit risk? Thank you.

Kevin Zhang -- Chief Financial Officer

Okay. Thank you for your questions. Actually, in generally, our credit performance [Indecipherable] otherwise we mentioned as improved, but when you [Indecipherable] P&L for example you see some data might be confusing, for example, the provision for accounts receivable [Indecipherable] provision for accounts receivable are increasing in Q3 [Indecipherable] when we compare to Q2, actually that is more of accounting and that means at Q1 our credit performance are improved, by the time we are not sure of whether this would be this sustainable. So, actually we do not a timely adjustment to focus all of those credit adjustment. So all of the impact were actually are adjusted in Q2, when we are more sure that our improvement to our credit control actually exits. So that is the reason we have some -- so if we can combine those outcomes for the first half year, actually that will be very similar to those presented in Q3. I can give some small impact of accounting treatment when we do some period end adjustments.

Luvian Hun -- Private Investor -- Analyst

So you mean that you -- the items in P&L show the future risks, yes?

Simon Cheng -- President

No, the items [Indecipherable] short term risk, but [Indecipherable] when we talk about -- So I was, actually if you, obviously you are comparing those with our performance in [Indecipherable] 2018 or with Q2 of 2019. I'm not sure which items you are comparing with.

Luvian Hun -- Private Investor -- Analyst

Compare with 2019 Q2?

Simon Cheng -- President

2019 this year? As I have mentioned, for example, generally our credit risks are improved and stable, but at the end of Q1, we actually see they are improvement, but we cannot do those adjustments on our P&L because we are not sure whether this improvement will be sustainable. So I think we are more prudent and at year end of Q2 we see it's a very clear trend that our credit performance are more stable and now improving, so actually all those impact are adjusted in Q2. So that, I mean you see it's a very small amounts for those accounts receivable provisions in Q2, but if you compare the month of June accounts receivable provision in Q2 with the average amount of Q1 and 2Q that means the average amount of first half, they will be very similar, as a percentage of our loan volume.

Luvian Hun -- Private Investor -- Analyst

Okay. Okay. Thank you.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Jennifer Zhang for any closing remarks.

Jennifer Zhang -- Director, Investor Relations

Thank you everyone for joining us on the call today. If you haven't got a chance to raise your questions, we'll be pleased to answer them through follow up contacts. I look forward to speaking with you again in the near future. Thank you.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Jennifer Zhang -- Director, Investor Relations

Simon Cheng -- President

Kevin Zhang -- Chief Financial Officer

John Cai -- Morgan Stanley -- Analyst

Luvian Hun -- Private Investor -- Analyst

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